China cuts rates as economic slowdown deepens

LinglingWei

BEIJING--China is stepping up monetary-easing measures in the face of a worse-than-expected economic slowdown, as authorities scramble to ease the heavy debt burdens of companies and governments.

The People's Bank of China said Sunday it would shave a quarter of a percentage point off benchmark lending and deposit rates, effective Monday--its third rate cut in six months. The move underscores growing fears among senior Chinese officials that a severe debt overhang as a result of rapid credit expansion over the past few years is threatening to derail efforts to pick up the world's second-largest economy.

In one of the starkest official warnings about China's growing debt woes, the PBOC said in its monetary-policy report Friday that the "rising debt size is forcing China to use a lot of resources in repaying and rolling over debt" while limiting the room for further fiscal expansion. The Wall Street Journal previously reported that the central bank is also considering a credit-easing tool that will allow local governments to restructure hefty debts.

Meanwhile, easing measures taken by the central bank--including two interest-rate reductions since November--have largely failed to spur new-loan demand. Instead, the actions have triggered a strong run-up in China's stock markets in recent months, which has helped the authorities to keep funds from flowing outside China but also led to concerns over speculative trading. Chinese shares tumbled last week as regulators moved to limit investors' ability to buy stocks with borrowed funds.

People with knowledge of the discussions say China's policy makers are increasingly concerned that Beijing may fall short of reaching its already-lowered expectations for growth--set at about 7% for this year, the lowest level in about a quarter-century. The latest rate cut came after China reported disappointing trade data on Friday and inflation data on Saturday that both highlighted weak domestic demand and subdued manufacturing activity. The real-estate market, which together with construction and other related industries accounts for a quarter of China's GDP, remains sluggish, casting one of the biggest shadows over the overall economy.

At the same time, bad loans are rising in China's vast banking system, fueling worries among Chinese policy makers over the country's rising financial risks. According to the China Banking Regulatory Commission, nonperforming loans surged 140 billion yuan ($22.6 billion) from the beginning of the year to 982.5 billion as of March 31, the biggest quarterly jump in more than a decade.

Dud loans made up 1.39% of all loans as of the end of March, up 0.14 percentage point from the end of 2014 and representing the highest level in five years. The rise of bad loans is crimping banks' profits at a time when they are being called upon to make credit more accessible. China's top five state-owned banks, for instance, saw their first-quarter profit grow less than 2%, compared with the double-digit growth rate typically seen in previous years.

The rate cut lowered by a quarter-percentage point both the benchmark one-year loan rate, to 5.1%, and the one-year deposit rate, to 2.25%. In a statement Sunday, the central bank singled out low inflation as a trigger for the move, saying real interest rates, adjusted for price changes, remain at historically high levels. In addition, in another step toward freeing up banks' deposit rates, the PBOC allowed Chinese banks greater flexibility in deciding how much they pay depositors. With the latest move, banks can raise one-year deposits rates to as high as 3.375%.

Of particular concern to officials at the PBOC and other regulators is the potential for credit to freeze up as a result of mounting defaults, Chinese officials and economists say. Already, based on estimates by economists at Royal Bank of Scotland, more than $300 billion in funds has left China's shores over the past six months, partly from the strength of the U.S. dollar and partly from ebbing confidence in the Chinese economy. More money could flow out if defaults keep rising, drying up funds for lending.

As a result, China's authorities are trying to come up with different ways to help alleviate borrowers' debt-repayment burdens, even though that can mean taking a direct government role in deciding winners and losers.

In Guangrao, an industrial county in eastern China's Shandong province, tire maker Deruibao Tire Co. has become a key target of a government-led rescue effort, according to a government spokesman and others involved in the process. Like other Chinese companies, Deruibao expanded rapidly soon after Beijing launched a massivestimulus package in late 2008. It took on debt, mostly bank loans, to build new plants, according to local officials and bankers familiar with the company's finances. All had gone well until last year, when plunging sales both at home and abroad led its bank creditors to call in loans.

Earlier this year, the company went to the government of Guangrao for help, according to a spokesman for the local government. Local officials then tried to get its banks to extend credit to the company, according to local officials and bankers with knowledge of the negotiations. Two local banks obeyed the order, these people said, but other national banks balked. Now, according to the spokesman for the Guangrao government, the county still is seeking to help prevent the company from filing for bankruptcy by "actively coordinating with all parties involved."

The main reason, according to Guangrao officials: Deruibao also guaranteed loans taken out by other companies, and a bankruptcy filing could trigger a chain of defaults.

"The regulators are on the lookout for any signs of systemic risks," a Guangrao official involved in Deruibao's affairs said. Representatives at the company declined to comment.

In addition to corporate debt, Chinese leaders have also singled out the ballooning debts of various levels of government. But a debt-for-bond swap plan aimed at giving provinces and cities some breathing room has hit snags, as many of China's commercial banks are balking at purchasing the new bonds.

That is prompting the PBOC to speed up consideration of A strategy similar to the one used in Europe's bailouts, officials with knowledge of the matter have said. Under the plan, the PBOC would let commercial banks swap the local-government bonds they purchase for loans from the central bank, with the aim of keeping the debt-restructuring effort on track without causing a painful credit crunch.

Many economists say the sharp deceleration in China's economic growth and the need to resolve its debt issues could lead the PBOC to launch more easing measures in the coming months. The central bank, meanwhile, has maintained cautious about stepping on the gas pedal too hard.

In the monetary-policy report released Friday, the central bank said it would continue to adopt various tools to ensure adequate liquidity in China's financial system while "preventing excessive easing."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.